Overview of FIP Issues in the Overview of FIP Issues in the RUC, Verifiable Cost, and other RUC, Verifiable Cost, and other

Nodal Market ProcessesNodal Market Processes

January 28, 2009January 28, 2009

WMS MeetingWMS Meeting

OutlineOutline

Review the issues with current language Review the issues with current language in nodal protocols regarding the gas price in nodal protocols regarding the gas price index (“FIP”)index (“FIP”)Review, section by section, the use of Review, section by section, the use of FIP FIP Discuss whether FIP is appropriate, or Discuss whether FIP is appropriate, or should it be modified.should it be modified.If FIP should be modified, discuss If FIP should be modified, discuss recommended changes.recommended changes.Discuss next steps.Discuss next steps.

What is the Issue?What is the Issue?

This presentation was developed after one This presentation was developed after one specific issue regarding FIP came to light. That specific issue regarding FIP came to light. That issue is:issue is:

–Current FIP language only recovers a fuel index Current FIP language only recovers a fuel index price. Does not recover other costs of fuel; such as price. Does not recover other costs of fuel; such as intra-day premiums, transport, swing, imbalance.intra-day premiums, transport, swing, imbalance.

This is especially troublesome for RUC committed units This is especially troublesome for RUC committed units since the gas will typically be purchased at Spot Gas Prices since the gas will typically be purchased at Spot Gas Prices after the market closes.after the market closes.Language in the nodal protocols would result in an under-Language in the nodal protocols would result in an under-recovery of costs for RUC deployed units in a vast majority recovery of costs for RUC deployed units in a vast majority of instances.of instances.Problem is not isolated to RUC units, but more pronounced Problem is not isolated to RUC units, but more pronounced since the units are forced on for reliability. FIP language since the units are forced on for reliability. FIP language also is used prospectively in nodal and that is also an issue.also is used prospectively in nodal and that is also an issue.

Where is FIP Used?Where is FIP Used?

Section 4.4.9.2.3 - Startup Offer and Minimum-Energy Section 4.4.9.2.3 - Startup Offer and Minimum-Energy Offer Generic Caps Offer Generic Caps Section 4.4.9.3.3 - Energy Offer Curve Caps for Make-Section 4.4.9.3.3 - Energy Offer Curve Caps for Make-Whole Calculation PurposesWhole Calculation PurposesSection 4.4.9.4 - Mitigated Offer Cap and Mitigated Section 4.4.9.4 - Mitigated Offer Cap and Mitigated Offer FloorOffer FloorSections 4.4.11 - System-Wide Offer Caps and Section Sections 4.4.11 - System-Wide Offer Caps and Section 4.4.11.1 - Scarcity Pricing Mechanism 4.4.11.1 - Scarcity Pricing Mechanism Section 5.6.1.1 - Verifiable Startup Costs*Section 5.6.1.1 - Verifiable Startup Costs*Section 5.6.1.2 - Verifiable Minimum-Energy Costs* Section 5.6.1.2 - Verifiable Minimum-Energy Costs* Section 6.6.6.2 - RMR Payment for EnergySection 6.6.6.2 - RMR Payment for EnergySection 7.9.1.3 - Minimum and Maximum Resource Section 7.9.1.3 - Minimum and Maximum Resource PricesPrices

4.4.9.2.3 - Startup Offer and Minimum-4.4.9.2.3 - Startup Offer and Minimum-Energy Offer Generic CapsEnergy Offer Generic Caps

DescriptionDescription: : This Section sets the startup and minimum-This Section sets the startup and minimum-energy offer caps until resources submit verifiable costs.energy offer caps until resources submit verifiable costs.Protocol excerptProtocol excerpt: :

–The Resource Category Minimum-Energy Generic Cap is the The Resource Category Minimum-Energy Generic Cap is the cost per MWh of energy for a Resource in producing energy up cost per MWh of energy for a Resource in producing energy up to and including the Resource’s LSL after breaker close, as to and including the Resource’s LSL after breaker close, as indicated by a telemetered Resource status of On-Line, indicated by a telemetered Resource status of On-Line, according to the following:according to the following:

(c) Combined cycle greater than 90 MW = 10 (c) Combined cycle greater than 90 MW = 10 MMBtu/MWh * ((Percentage of FIP * FIP) + (Percentage of MMBtu/MWh * ((Percentage of FIP * FIP) + (Percentage of FOP * FOP))/100, as specified in Minimum-Energy Offer;…..FOP * FOP))/100, as specified in Minimum-Energy Offer;…..

RecommendationRecommendation: : No change to FIP language.No change to FIP language.ReasonReason: : The generic caps were set low to provide incentives The generic caps were set low to provide incentives for resource owners to submit verifiable costs.for resource owners to submit verifiable costs.

4.4.9.3.3 - Energy Offer Curve Caps for 4.4.9.3.3 - Energy Offer Curve Caps for Make-Whole Calculation Purposes Make-Whole Calculation Purposes

DescriptionDescription: : FIP is used in 4.4.9.3.3 to calculate the make-FIP is used in 4.4.9.3.3 to calculate the make-whole caps when reimbursing a QSE for allowable energy costs whole caps when reimbursing a QSE for allowable energy costs not recovered in energy revenue when the Resource is committed not recovered in energy revenue when the Resource is committed by the DAM or by a RUC.by the DAM or by a RUC. Protocol excerptProtocol excerpt::

–(1) (1) The following Energy Offer Curve Caps must be used for The following Energy Offer Curve Caps must be used for the purpose of Make-Whole Settlements:the purpose of Make-Whole Settlements:

(c) Combined Cycle greater than 90 MW = 9 MMBtu/MWh (c) Combined Cycle greater than 90 MW = 9 MMBtu/MWh * ((Percentage of FIP * FIP) + (Percentage of FOP * * ((Percentage of FIP * FIP) + (Percentage of FOP * FOP))/100, as specified in the Energy Offer Curve;FOP))/100, as specified in the Energy Offer Curve;(d) Combined Cycle less than or equal to 90 MW = 10 (d) Combined Cycle less than or equal to 90 MW = 10 MMBtu/MWh * ((Percentage of FIP * FIP) + (Percentage of MMBtu/MWh * ((Percentage of FIP * FIP) + (Percentage of FOP * FOP))/100, as specified in the Energy Offer Curve FOP * FOP))/100, as specified in the Energy Offer Curve Offer;Offer;

RecommendationRecommendation: : No change to FIP language.No change to FIP language.ReasonReason: : 100% fuel price accuracy is not necessary when 100% fuel price accuracy is not necessary when using the generic heat rates. using the generic heat rates.

DescriptionDescription:: FIP is used in 4.4.9.4 to calculate the offer caps FIP is used in 4.4.9.4 to calculate the offer caps and floors for resources that are subject to real-time mitigation. and floors for resources that are subject to real-time mitigation. Protocol excerptProtocol excerpt::

–(a) For a Generation Resource that commences commercial (a) For a Generation Resource that commences commercial operation after January 1, 2004, ERCOT shall construct an operation after January 1, 2004, ERCOT shall construct an incremental mitigated offer cap curve (Section 6.5.7.3) such incremental mitigated offer cap curve (Section 6.5.7.3) such that each point on the Mitigated Offer Cap curve (Cap vs. that each point on the Mitigated Offer Cap curve (Cap vs. output level) is the greater of:output level) is the greater of:

(i)14.5 MMBtu/MWh times the minimum of Fuel Index Price (FIP) (i)14.5 MMBtu/MWh times the minimum of Fuel Index Price (FIP) or Fuel Oil Price (FOP); or or Fuel Oil Price (FOP); or (ii) the Resource’s verifiable incremental heat rate (MMBtu/MWh) (ii) the Resource’s verifiable incremental heat rate (MMBtu/MWh) for the output level multiplied by ((Percentage of FIP * FIP) + for the output level multiplied by ((Percentage of FIP * FIP) + (Percentage of FOP * FOP))/100, as specified in the Energy Offer (Percentage of FOP * FOP))/100, as specified in the Energy Offer Curve, plus verifiable variable O&M cost ($/MWh) times a Curve, plus verifiable variable O&M cost ($/MWh) times a multiplier described in (c);multiplier described in (c);

RecommendationRecommendation:: No change to FIP language.No change to FIP language.ReasonReason:: 100% fuel price accuracy is not necessary when calculating 100% fuel price accuracy is not necessary when calculating offer caps and floors.offer caps and floors.

4.4.9.4 - Mitigated Offer Cap and 4.4.9.4 - Mitigated Offer Cap and Mitigated Offer FloorMitigated Offer Floor

DescriptionDescription:: FIP is used in 4.4.11 and 4.4.11.1 to calculate FIP is used in 4.4.11 and 4.4.11.1 to calculate the low system-wide offer cap (LCAP) and the peaker operating the low system-wide offer cap (LCAP) and the peaker operating cost (POC) in order to reset the system-wide offer caps if and cost (POC) in order to reset the system-wide offer caps if and

when the peaker net margin is reached.when the peaker net margin is reached. Protocol excerptProtocol excerpt::

–((a) The LCAP is set on a daily basis at the higher of:a) The LCAP is set on a daily basis at the higher of:(i) $500 per MWh for energy and $500 per MW per hour (i) $500 per MWh for energy and $500 per MW per hour for Ancillary Services; orfor Ancillary Services; or(ii) Fifty times the FIP of the previous Operating Day, (ii) Fifty times the FIP of the previous Operating Day, expressed in dollars per MWh for energy and dollars per expressed in dollars per MWh for energy and dollars per MW per hour for Ancillary Services….;MW per hour for Ancillary Services….;

RecommendationRecommendation:: No change to FIP language.No change to FIP language.

ReasonReason:: 100% fuel price accuracy is not necessary when 100% fuel price accuracy is not necessary when estimating POC and/or resetting offer caps and floors.estimating POC and/or resetting offer caps and floors.

4.4.11 - System-Wide Offer Caps and 4.4.11 - System-Wide Offer Caps and 4.4.11.1 - Scarcity Pricing Mechanism 4.4.11.1 - Scarcity Pricing Mechanism

DescriptionDescription:: FIP is used in 5.6.1.1 as the fuel price when submitting FIP is used in 5.6.1.1 as the fuel price when submitting verifiable startup costs. These costs serve as startup verifiable startup costs. These costs serve as startup caps for all offers caps for all offers prospectivelyprospectively. . Protocol excerptProtocol excerpt::

–The unit-specific verifiable costs for starting a Resource for The unit-specific verifiable costs for starting a Resource for each cold, intermediate, and hot start condition, as each cold, intermediate, and hot start condition, as determined using the data submitted under Section 5.6.1, determined using the data submitted under Section 5.6.1, Verifiable Costs, above and the Resource Parameters for the Verifiable Costs, above and the Resource Parameters for the Resource areResource are: :

(a) Actual fuel consumption rate per start (MMBtu/start) (a) Actual fuel consumption rate per start (MMBtu/start) multiplied by a resource category generic fuel price (FIP, multiplied by a resource category generic fuel price (FIP, FOP, or $1.50 per MMBtu, as applicable); and FOP, or $1.50 per MMBtu, as applicable); and (b) Unit-specific verifiable operation and maintenance (b) Unit-specific verifiable operation and maintenance expenses.expenses.

RecommendationRecommendation:: Modify the language to be FIP * 1.X Modify the language to be FIP * 1.X (recommend 1.10).(recommend 1.10).ReasonReason:: FIP does not cover all costs of fuel: Transport, Swing, FIP does not cover all costs of fuel: Transport, Swing, Imbalance. In addition, fuel Purchased for RUC committed units Imbalance. In addition, fuel Purchased for RUC committed units will be purchased at Spot Gas Prices, normally much higher than will be purchased at Spot Gas Prices, normally much higher than day-ahead.day-ahead.

5.6.1.1 - Verifiable Startup Costs*5.6.1.1 - Verifiable Startup Costs*

DescriptionDescription:: FIP is used in 5.6.1.2 as the fuel price when submitting FIP is used in 5.6.1.2 as the fuel price when submitting verifiable minimum-energy costs. These costs serve as verifiable minimum-energy costs. These costs serve as minimum energy minimum energy

caps for all offers prospectivelycaps for all offers prospectively. . Protocol excerptProtocol excerpt::

–The unit-specific verifiable minimum-energy costs for a The unit-specific verifiable minimum-energy costs for a Resource are:Resource are:

(a) (a) ActualActual fuel cost to operate the unit at LSL; plus fuel cost to operate the unit at LSL; plus(b) Variable operation and maintenance expenses; plus(b) Variable operation and maintenance expenses; plus(c) Nodal implementation surcharges to operate the unit at (c) Nodal implementation surcharges to operate the unit at LSL.LSL.

–……For gas-fired units, the actual fuel costs must be calculated For gas-fired units, the actual fuel costs must be calculated using the actual seasonal heat rate (which must be supplied to using the actual seasonal heat rate (which must be supplied to ERCOT with seasonal heat-rate test data) ERCOT with seasonal heat-rate test data) multiplied by FIPmultiplied by FIP......

RecommendationRecommendation:: Modify the language to be Modify the language to be FIP * 1.X FIP * 1.X (recommend 1.10)(recommend 1.10)..ReasonReason:: FIP does not cover all costs of fuel: Transport, Swing, FIP does not cover all costs of fuel: Transport, Swing, Imbalance. In addition: fuel Purchased for RUC committed units Imbalance. In addition: fuel Purchased for RUC committed units will be purchased at Spot Gas Prices, normally much higher than will be purchased at Spot Gas Prices, normally much higher than day-ahead.day-ahead.

5.6.1.2 - Verifiable Minimum-Energy Costs*

DescriptionDescription:: FIP is used in 6.6.6.2 as an approximation of the fuel FIP is used in 6.6.6.2 as an approximation of the fuel costs paid for energy produced from RMR units on the initial settlement costs paid for energy produced from RMR units on the initial settlement and settlements prior to True-up. Actual submitted costs are ultimately and settlements prior to True-up. Actual submitted costs are ultimately

paid for RMR-produced energy. paid for RMR-produced energy. Protocol excerptProtocol excerpt::

–Payment for energy on the Initial Settlement and settlements Payment for energy on the Initial Settlement and settlements executed before True-up and before actual cost data is executed before True-up and before actual cost data is submitted must be calculated using the estimated input/output submitted must be calculated using the estimated input/output curve and startup fuel as specified in the RMR Agreement, the curve and startup fuel as specified in the RMR Agreement, the actual energy produced and the Fuel Index Price (FIP). The actual energy produced and the Fuel Index Price (FIP). The payment for energy for all other settlements must be based on payment for energy for all other settlements must be based on actual fuel costs for the RMR Unit.actual fuel costs for the RMR Unit.

RecommendationRecommendation:: No change to FIP languageNo change to FIP language..ReasonReason:: FIP is only used as an initial estimate. RMR payments FIP is only used as an initial estimate. RMR payments are ultimately based on actual submitted fuel costs.are ultimately based on actual submitted fuel costs.

6.6.6.2 - RMR Payment for Energy6.6.6.2 - RMR Payment for Energy

DescriptionDescription:: FIP is used in 7.9.1.3 to determine the hedge FIP is used in 7.9.1.3 to determine the hedge

value of CRRs that source or sink at resources. value of CRRs that source or sink at resources. Protocol excerptProtocol excerpt::

–Minimum Resource Prices for Resources located at source Minimum Resource Prices for Resources located at source Settlement Points are:Settlement Points are:

(d) Combined Cycle greater than 90 MW = FIP * 5 (d) Combined Cycle greater than 90 MW = FIP * 5 MMBtu/MWh;MMBtu/MWh;(e) Combined Cycle less than or equal to 90 MW = FIP * 6 (e) Combined Cycle less than or equal to 90 MW = FIP * 6 MMBtu/MWh;MMBtu/MWh;(f) Gas -Steam Supercritical Boiler = FIP * 6.5 MMBtu/MWh;(f) Gas -Steam Supercritical Boiler = FIP * 6.5 MMBtu/MWh;

RecommendationRecommendation:: No change to FIP language.No change to FIP language.

ReasonReason:: 100% fuel price accuracy is not necessary when 100% fuel price accuracy is not necessary when estimating the hedge value of CRRS.estimating the hedge value of CRRS.

7.9.1.3 - Minimum and Maximum Resource 7.9.1.3 - Minimum and Maximum Resource PricesPrices

Recommendations herein only suggests modifying FIP in two Recommendations herein only suggests modifying FIP in two sections of the nodal protocols:sections of the nodal protocols:– Section 5.6.1.1 - Verifiable Startup Costs*Section 5.6.1.1 - Verifiable Startup Costs*– Section 5.6.1.2 - Verifiable Minimum-Energy Costs* Section 5.6.1.2 - Verifiable Minimum-Energy Costs*

FIP + 10% will better align cost recovery to actual gas prices. FIP + 10% will better align cost recovery to actual gas prices. FIP alone does not cover costs.FIP alone does not cover costs.

VCWG still reviewing the possibility of utilizing this concept for VCWG still reviewing the possibility of utilizing this concept for a simplification of Exceptional Events related to high spot gas a simplification of Exceptional Events related to high spot gas during RUC events. To be discussed in next VCWG presentation.during RUC events. To be discussed in next VCWG presentation.

FIP + 10% was chosen because 1) it is similar to wording in FIP + 10% was chosen because 1) it is similar to wording in current zonal protocols: Section “current zonal protocols: Section “6.8.1.11(3)(b) - For gas fired Resources, such documentation will not be required if the requested incremental fuel cost is less than one hundred ten percent (110%) of the Fuel Index Price; and 2) similar to other markets (ex: From PJM operating agreement, section 6.4, Offer Price Caps, for reliability services: “The offer price cap shall be one of the amounts specified below… (ii) The incremental operating cost of the generation resource…plus 10% of such costs…

FIP + adder similar to RMR language. RMR is a reliability FIP + adder similar to RMR language. RMR is a reliability service (just like RUC but with longer terms), and RMR language service (just like RUC but with longer terms), and RMR language provides complete recovery of provides complete recovery of actualactual fuel costs. fuel costs.

Language in nodal protocol Section 5.6.1.2 is not technically Language in nodal protocol Section 5.6.1.2 is not technically correct. correct. ActualActual fuel costs are not recovered if only FIP is fuel costs are not recovered if only FIP is allowed.allowed.

SummarySummary

Questions???Questions???

Appendix: Section 3 of the Nodal Appendix: Section 3 of the Nodal ProtocolsProtocols

RMR units:RMR units: Examples of Eligible Costs include the following to the extent they each Examples of Eligible Costs include the following to the extent they each

meet the standard for eligibility: “meet the standard for eligibility: “Reservation and transportation costsReservation and transportation costs associated with firm fuel supplies not recovered under Section 6.6.6.2, associated with firm fuel supplies not recovered under Section 6.6.6.2, RMR Payment for Energy;RMR Payment for Energy;

Subject to the reductions described in items (2) and (3), the Subject to the reductions described in items (2) and (3), the Incentive Incentive Factor for RMR Agreements is equal to 10% of the actual Eligible CostsFactor for RMR Agreements is equal to 10% of the actual Eligible Costs excluding fuel costs incurred by the RMR Unit. excluding fuel costs incurred by the RMR Unit.

The RMR Unit owner shall provide ERCOT with The RMR Unit owner shall provide ERCOT with actual fuel costsactual fuel costs on a on a monthly basis for the RMR Unit in a level of detail sufficient for ERCOT to monthly basis for the RMR Unit in a level of detail sufficient for ERCOT to verify that all fuel costs are actual and appropriate. The verify that all fuel costs are actual and appropriate. The estimated fuel estimated fuel payments may include a fuel adder to better approximate expected actual payments may include a fuel adder to better approximate expected actual fuel costsfuel costs. ERCOT shall perform a true-up of the estimated fuel costs using . ERCOT shall perform a true-up of the estimated fuel costs using the submitted and verified actual fuel costs for the RMR Unit. Actual cost the submitted and verified actual fuel costs for the RMR Unit. Actual cost data must be submitted on time by the Generation Entity for the RMR Unit data must be submitted on time by the Generation Entity for the RMR Unit and then verified by ERCOT so the actual cost data can be reflected in the and then verified by ERCOT so the actual cost data can be reflected in the True-Up Settlement Statement. True-Up Settlement Statement.

Actual fuel costs must be appropriate actual costs attributable to ERCOT’s Actual fuel costs must be appropriate actual costs attributable to ERCOT’s scheduling and/or deployment of the RMR Unit. Actual fuel costs may scheduling and/or deployment of the RMR Unit. Actual fuel costs may include cost of fuel (including the cost of exceeding swing gas contract include cost of fuel (including the cost of exceeding swing gas contract limits, additional gas demand costs set by fuel supply, or transportation limits, additional gas demand costs set by fuel supply, or transportation contracts); demand fees, imbalance penalties, transportation charges, and contracts); demand fees, imbalance penalties, transportation charges, and cash out premiums.cash out premiums.